Why a Pension Makes Sense
askpaul explains why having a pension makes sense:
So, you’re in the pension section, and I told you I was going to give you a few reasons why I think pensions make sense. The first one I want to talk to you about is tax & tax-havens. A pension is basically a tax haven. You get tax relief on the way in, depending on the amount of income tax you pay. If you’re on the lower rate of income tax, you’re going to get 20% relief from every contribution. Every time you put €100 with your pension, you’re going to get €20 back off revenue, so it really only costs you €80. You are up 20% straight away.
If you’re on the higher rate of income tax, which is currently 40% while recording this video, you’re going to get 40% back. What does that mean? Well, when you put €100 with your pension, you get €40 back, or you have a net cost of €60. So, straight away, you’re either up 20% or 40% – not a bad return. And that’s before you invest a penny.
The next thing I’m going to talk about in tax, in relation to your pension, is that your fund grows tax-free. Now, why is this so important? If you remember back to school, remember compound interest? This is this compound interest on steroids because it is tax-free. Any other investment vehicle either gets taxed at the end of the year or maybe after the 8th anniversary, depending on which investment strategy you are using.
A pension grows tax-free for as long as you remain in the fund. So, if you’re in your 30s, and you’re going to retire at 68, you have 38 years of tax-free growth. On compound interest, that makes a massive difference to how much money you can accumulate in your pension. That is the first reason why I really like a pension account in order for people to get tax havens over a long period of time and your money grows much quicker in that environment.
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